TORONTO, Oct. 29, 2012 /CNW/ - After a strong gain in August, Scotiabank's Commodity Price Index continued to rally in September, climbing 3.8% month over month (m/m). The All Items Index approached levels last seen in March 2012 and is now 13.8% below the near-term peak in April 2011 - just prior to the advent of concern over Eurozone sovereign debt and the negative fallout on global growth.
"Easier monetary policy and liquidity injections by the European Central Bank, the Fed and the Bank of Japan - to shore up a struggling world economy - boosted investor and business confidence in September, lifting 'riskier assets,' such as commodities and equities," said Patricia Mohr, Vice President, Economics and Commodity Market Specialist at Scotiabank.
Oil and gas led the gain in the Scotiabank Commodity Price Index (+8.8% m/m) last month. International oil prices only inched up, with Brent rising from US$112.68 per barrel in August to US$113.02, after rebounding sharply from much lower levels of just under US$103 in June and only US$96 in July. Similarly West Texas Intermediate (WTI) oil edged ahead to US$94.56. However both light and heavy oil prices in Western Canada rose more than international benchmarks, with particular strength in Western Canadian Select (WCS) heavy oil. The WCS discount appears to narrow seasonally in the autumn alongside less refinery maintenance in the U.S. - the destination for the vast bulk of Canadian oil exports.
The Metal and Mineral Index bounced back in September (+2.2% m/m), as broad-based gains in base and precious metals more than offset a slight decline in potash and uranium prices and lower iron ore. Improved investor risk appetite bolstered base metal prices, with copper rallying from US$3.40 per pound in August to US$3.65 in September and US$3.68 to date in October (currently at US$3.52).
In contrast, the Forest Product Index eased back in September (-1.6% m/m) after a strong pick-up in August. Oriented strand board (OSB) prices continued to spike, with U.S. North Central prices climbing to a very profitable US$347.50 per thousand square foot. U.S. linerboard producers also implemented the first price increase since April 2010 - up US$50 to US$690 per short ton. These gains were more than offset by a decline in Western Spruce-Pine-Fir 2x4 lumber prices from a strong US$310 per thousand board feet in August to a still lucrative US$296. However lumber prices have snapped back in October (currently at US$313) alongside another improvement in U.S. housing starts in September (872,000 units annualized, up from a mere 647,000 a year earlier).
The Agricultural Index also edged down in September (-0.4% m/m). Gains in canola, barley and wheat were countered by a temporary fall-off in hog prices from almost US$80 per hundredweight to US$66. Inventory liquidation by hog farmers, in response to high feed grain prices, probably accounts for this decline, though lower farrowing intensions across North America will boost prices next year.
"World oil prices are likely to remain at historically high levels over the next five years," said Ms. Mohr, in a special feature on oil markets. "However underlying developments show a dramatic change in regional oil supply and demand balances and trade flows.
"How Canada responds to these changes will be critical in maintaining and enhancing our position as an energy superpower," added Ms. Mohr.
According to the report, some of the underlying developments on the demand side include:
On the supply side, key developments include:
"However U.S. refineries in the eastern Gulf Coast currently import heavy crude from Brazil and Colombia and competition for Western Canada from these areas could grow," said Ms. Mohr.
Changing oil market dynamics highlight the increasing commercial risk for Western Canada's oil patch of relying largely on one major export market - the U.S. - and the critical need to build additional pipeline and rail capacity to the B.C. coast to tap into the faster-growing markets of the Pacific Rim.
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SOURCE: Scotiabank
Patricia Mohr, Scotiabank Economics, (416) 866-4210, patricia.mohr@scotiabank.com; or
Devinder Lamsar, Media Communications, (416) 933-1171, devinder.lamsar@scotiabank.com.